A Health Savings Account (HSA) provides a tax-free way for those participating in a High Deductible Health Plan (HDHP) to save and pay for eligible health-related expenses. According to an America’s Health Insurance Plans survey, 22 million Americans are taking advantage of the tax benefits HSAs offer.
But if you’re not prepared, you could be in for sticker shock the first time you go to the doctor after you switch from a traditional health insurance plan to a HDHP, even if you have funds in an HSA to help cover the cost. So how do you know if an HSA is right for you? Here are seven things to consider before enrolling in one.
1. Your financial responsibility
Setting aside tax-free dollars and withdrawing them tax-free to pay for medical expenses may seem like a great idea. But it’s important to understand the impact transitioning to a high-deductible health plan could have on your out-of-pocket expenses if you’re used to a traditional health care plan.
If you opt for a HDHP, your monthly premiums will usually be lower than they would with a traditional plan. However, your out-of-pocket expenses for health care could be higher—at least initially—because you’ll be responsible for paying 100% of your health care costs until you meet your plan’s deductible each year.
That means a trip to the doctor that used to cost you a $20 copay could end up costing hundreds of dollars. After you meet the deductible, however, the insurance company should begin paying a portion of your expenses.
If you have an HDHP, your annual out-of-pocket expenses can’t exceed $6,650 for an individual or $13,300 for a family for in-network services. However, the cap doesn’t apply to out-of-network services.
2. Eligibility requirements
In general, you’re eligible to open a Health Savings Account if:
- You have a high-deductible insurance plan. In 2019, high-deductible plans are those that have a minimum annual deductible of $1,300 for individuals and $2,700 for families; and a maximum annual deductible and other out-of-pocket expenses of $6,750 for individuals and $13,500 for families
- You aren’t enrolled in Medicare
- You aren’t claimed as a dependent on someone else’s tax return
- You have no other health care coverage (there are a few exceptions)
In addition, if you’re covered by a HDHP and a Flexible Spending Arrangement (FSA) or Health Reimbursement Arrangement (HRA) that pays for eligible medical expenses, you won’t typically be eligible for an HSA.
3. Contributing to an HSA
Once your account is open, you may contribute pre-tax dollars to it. Your employer and other family members may also be eligible to contribute.
In 2019, the contribution limit for an individual is $3,500 and $7,000 for a family. If you’re over 55, you can contribute an additional $1,000 per year. All contributions must be made in cash. Contributions of stock or property are not permitted.
4. Use it or lose it?
If you’re familiar with Flexible Spending Arrangements (FSA), you probably know that, in many cases, money that’s contributed to an FSA must be used by the end of the year. If you don’t use it, you forfeit the remaining funds. But that’s not how HSAs work. If you don’t use all of the money you’ve contributed to your HSA, it rolls over from year to year.
In addition, HSAs are portable, which means if you have money in an HSA when you leave your current employer or retire, you get to take it with you.
5. Institutions that offer HSAs
Some employers that offer HDHPs also offer HSAs. But if your employer doesn’t offer an HSA and you want to open one, you’ll have to take care of it on your own. Banks, credit unions, insurance companies, and IRS-approved entities may offer HSAs that can be used in conjunction with HDHPs.
6. Eligible expenses
When you contribute money to an HSA, the funds may be withdrawn tax-free to pay for a variety of eligible health-related expenses, including but not limited to:
- Doctor visits
- Hospital services
- Prescriptions
- Glasses
- Contact lenses
- Dental treatment
- Fertility treatments
- Lab fees
- Medical supplies
For additional information about eligible medical expenses, refer to IRS Publication 502.
7. An investment for the future
Many HSAs allow you to invest your contributions in stocks, bonds, mutual funds, and other investment vehicles, which gives you an opportunity to save for the future. If you have few medical expenses now and can afford to pay for the ones you do incur without tapping into your HSA, the value of your account may grow over time.
This could help increase the funds you have available to pay for medical expenses in retirement, when your healthcare costs are likely to be higher. Plus, after you reach age 65, you can use the money for anything—even if it’s not health related—without paying any taxes or penalties on it.
Before you decide whether an HSA is right for you, be sure you understand all the financial implications transitioning to a high-deductible health plan will bring. Then weigh the benefits of lower monthly premiums from a HDHP and tax benefits of an HSA against the potential increase in out-of-pocket medical expenses.
Jennifer Brozic began her writing career at seven years old, when she scribed the epic tale of her kite-flying (and skyward-looking) uncle crossing paths with a deep hole in a sandy beach. After earning a degree in journalism, Jen worked in the insurance and financial services industries before earning a master’s degree in communication management. She left the nine-to-five corporate world in 2010 and has been freelance writing ever since. Her areas of expertise include insurance, financial planning & budgeting, and building credit.
